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From Securities Regulation Daily, September 30, 2013

Challenge to Sirius board’s failure to adopt poison pill time-barred

By John M. Jascob, J.D.

A shareholder challenge to anti-takeover provisions in an investment agreement involving Sirius XM Radio Inc. (Sirius) was barred on statute of limitations grounds. The plaintiff shareholders contended that the Sirius board had breached its fiduciary duties by failing to adopt a poison pill after agreeing to a $530-million infusion of capital by Liberty Media Corporation (Liberty Media) in exchange for Sirius stock. The Delaware Chancery Court dismissed the complaint, however, ruling that the fiduciary duty claims fell outside the three-year limitations period applicable under Delaware law (In re Sirius XM Shareholder Litig., September 27, 2013, Strine, L.).

Background. In order to stabilize its finances and develop new sources of revenue, Sirius had negotiated a $530-million capital investment from Liberty Media in 2009 that granted Liberty Media preferred stock in Sirius that was convertible into a 40-percent common equity interest. Although the Sirius board negotiated a standstill provision that limited Liberty Media’s ability to take majority control of Sirius for three years, the investment agreement specifically prevented the Sirius board from using a poison pill or other means to interfere with Liberty Media’s ability to purchase additional Sirius stock, once the standstill period expired.

When the standstill period ended in 2012, Liberty Media announced that it intended to acquire majority control of Sirius and began purchasing additional stock on the open market. The plaintiffs then filed suit, alleging that the Sirius board had breached its fiduciary duties by adhering to the provisions of the investment agreement that precluded the board from taking measures to prevent Liberty Media from acquiring control. The plaintiffs also alleged that Liberty Media had breached its fiduciary duties as a controlling stockholder by purchasing shares on the open market to acquire majority control of Sirius without paying a premium.

Laches. Chancellor Strine observed, however, that the anti-takeover provisions contained in the investment agreement with Liberty Media were agreed to and disclosed to the public in 2009, more than three years prior to the filing of the complaint. Although the plaintiffs argued that they were challenging the board’s failure to adopt a poison pill in 2012, a cause of action accrues under Delaware law at the moment of the wrongful act. Even if the plaintiffs did have a claim that the provisions were unenforceable, therefore, that claim accrued outside the three-year limitations period because the Sirius board’s inability to block Liberty Media’s “creeping takeover” merely manifested the bargain struck between the parties at the time they entered into the investment agreement in 2009.

The court also found unconvincing the plaintiffs’ contention that they were either unaware of the consequences of the anti-takeover provisions or lulled into repose until the standstill period expired. The court noted that the investment agreement was timely and repeatedly disclosed in 2009, and the agreement’s plain terms made clear that, once the standstill period expired, Liberty Media could acquire majority control of Sirius by making open market purchases without interference from the Sirius board. As reasonable Sirius stockholders were on full notice of the investment agreement’s terms, the plaintiffs had no excuse for failing to challenge the anti-takeover provisions within the three-year limitations period.

No abuse of fiduciary power. The court also rejected the plaintiffs’ argument that, even if Liberty Media had specifically negotiated for the right to prevent the Sirius board from using a poison pill once the standstill period ended, Liberty Media was nevertheless subject to a “duty of fairness” that precluded it from buying additional shares in the marketplace except in a transaction that was approved as fair by the Sirius board of directors. The claim was still time-barred, the court ruled, because the investment agreement was the product of an arm’s-length negotiation between Liberty Media, which was not stockholder at that time, and the Sirius board. Accordingly, the plaintiffs were in fact challenging the failure of the Sirius board to negotiate a good contract in 2009.

Moreover, the plaintiffs’ allegation that Liberty Media breached fiduciary duties it supposedly owed as a controlling stockholder simply by making open market purchases to acquire a majority of Sirius’ voting shares failed to state a cognizable claim. Chancellor Strine noted that the plaintiffs were unable to point to anything that Liberty Media did that involved control over Sirius board or misuse of its resources in connection with those purchases. The mere fact that Liberty Media made open market purchases that increased its level of ownership to over 50 percent did not support a claim for breach of fiduciary duty because those purchases did not involve any use of fiduciary power by Liberty Media.

The court further observed that it was natural for the plaintiffs to want the company in which they invested to have all of the upside but none of the downside that comes with real world commercial transactions. If commercial transactions are to facilitate wealth creation, however, they must be enforced fairly and in a manner that recognizes that both sides gave consideration. Accordingly, the plaintiffs were not entitled to watch Sirius take over half a billion dollars in capital from Liberty Media, sit on the sidelines benefitting from that investment until after the statute of limitations expired, and then belatedly seek to deprive Liberty Media of the benefits of the contract it had received in exchange.

The case is No. 7800-CS.

Attorneys: Stuart M. Grant, Cynthia A. Calder and Mary Thomas (Grant & Eisenhofer, P.A.) for Plaintiffs and the Proposed Class. Donald J. Wolfe Jr., Michael B. Tumas and Peter J. Walsh (Potter Anderson & Corroon LLP) for David J.A. Flowers, Gregory B. Maffei, John C. Malone, Carl E. Vogel, Vanessa A. Wittman, Liberty Media Corporation, and Liberty Radio, LLC. Raymond J. DiCamillo, Scott W. Perkins and Jacob Werrett (Richards, Layton & Finger, P.A.) for Sirius XM Radio Inc., Joan L. Amble, Leon D. Black, Lawrence F. Gilberti, Eddy W. Hartenstein, James P. Holden, Mel Karmazin, James Meyer, James F. Mooney and Jack Shaw.

Companies: Liberty Media Corporation; Liberty Radio, LLC; Sirius XM Radio Inc.

MainStory: TopStory CorporateGovernance DelawareNews DirectorsOfficers MergersAcquisitions

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